Golden opportunity or fool’s gold?

| July 05, 2007

Love them or hate them, public-private partnerships are attracting the attention of politicians nationwide. Overdrive takes a look at both sides of the issue and how such projects will affect you.

When owner-operator Randy Nace heard Indiana Gov. Mitch Daniels’ proposal to lease the Indiana Toll Road to private investors, “I didn’t think anybody was dumb enough to do it,” he recalls. But upon learning the project was on a fast track for approval, the Indiana native contacted the nonprofit advocacy group Citizens Action Coalition. Together, CAC, Nace and six other Indianans sued in April 2006 to stop the deal, calling it unconstitutional. The judge ruled against the group, which had raised more than $100,000 for the fight with help from the Owner-Operator Independent Drivers Association, individual truckers and Indiana residents.

Two months later, Indiana leased the toll road to Cintra-Maquarie, an Australian-Spanish consortium, for 75 years and $3.85 billion.

The Indiana Toll Road lease is the most controversial example of state and local governments contracting with private companies to manage existing toll roads or design, finance and build roads – in exchange for toll revenue. Proponents of these public-private partnerships, also called P3s, say they generate badly needed funds to build new roads, fix old ones and ease congestion more quickly and efficiently than possible if left to the public sector. Opponents charge that such partnerships merely hock the roads for ready cash today without considering the potential financial effect on motorists today and in the future.

Given state and federal governments’ reluctance to raise fuel taxes, a solution to the nation’s need for transportation improvements is “not going to come about in any timely fashion without some form of new funding mechanism,” says Robert Poole, director of transportation studies at the Reason Foundation.

In many cases, that means P3s. Proponents say revenue from P3s can fund capacity that would make roads more efficient for truckers and other motorists. As part of Gov. Daniels’ Major Moves program, for example, the $3.85 billion Indiana received for the lease of its toll road will fund more than 200 transportation projects around the state. In Pennsylvania, Gov. Ed Rendell has proposed leasing the Turnpike to fund mass transit systems, roads and bridges.

But critics, especially those in trucking, charge that such improvements come at too high a price. In comments made at a May hearing before the U.S. House Subcommittee on Highways and Transit, Bill Graves, president and CEO of the American Trucking Associations, said that under the Indiana Toll Road lease, rates for a 5-axle truck traversing the entire stretch could increase 172 percent by 2010 – from $14.55 to $39.64. That could grow to $580.58 or even higher throughout the term of the lease, according to an analysis of maximum possible increases by Dennis Enright, a principal at NW Financial Group.

Another criticism: Roads have been leased too cheaply. One study estimates that Indiana Toll Road investors may see a return on their investment in a mere 15 years – with 59 years of profit to go, amounting to a potential $21 billion.

Truckers view the tolls that yield such profits as double taxation – or worse – because they already pay 24.4 cents per gallon in federal diesel fuel tax, a 12 percent excise tax on new tractors and trailers, an annual vehicle use tax of up to $550 and a tire tax. “Motorists as well as truckers have paid for these roads with fuel taxes,” says Clayton Boyce, public affairs vice president for the American Trucking Associations.

“It is nothing more than a taxpayer-funded shell game when existing public highways are converted to toll roads after money to pay for their construction and maintenance has already been collected,” says company driver Jeff Kleb of Midlothian, Va.

Administrative costs make toll collection an inefficient way to fund roads, Boyce argues. “It costs about a third of every dollar collected to collect tolls, whereas using fuel taxes it’s 2 to 3 percent in costs.”

Critics also worry that investors don’t have the public’s best interest in mind. “The companies lining up to buy our roads aren’t doing it out of the goodness of their hearts,” says Todd Spencer, OOIDA executive vice president. “They see long-term cash flows and guaranteed, healthy profits at the public’s expense.”

But P3 proponents are unapologetic about the profit potential. “The private sector is not in the business of philanthropy,” says Richard Norment, executive director of the National Council for Public-Private Partnerships. Because private entities run toll roads like businesses, “the people who are using the road can see a substantial improvement in service – enough to justify the toll increase,” Norment says.

For instance, P3 contracts spell out specific times to fix a pothole or remove a dead animal from the highway. P3s also can be quicker to adopt new technologies that can improve traffic mobility. After Cinqua-Maquarie leased the Chicago Skyway, it implemented electronic tolling within months, something the city had failed to accomplish in years.

Such benefits aren’t enough to offset the consequences of increasing toll rates, critics say. They warn that high tolls may push motorists onto alternate routes on local roads, causing congestion and jeopardizing safety. That happened on the publicly funded 241-mile Ohio Turnpike when it phased in toll increases for large trucks in the late ’90s. After years of truckers using secondary roads, Ohio rolled back the rates by about 25 percent in 2005.

P3 proponents use this example to make their case. Private investors cannot set toll rates unreasonably high, they argue, or motorists will opt for free access routes, leaving investors with no way to recoup their money. “There’s ultimately a sort of market test for rates not being unrealistic,” Poole says.

If private investors successfully can raise tolls, why can’t the public sector do it? Two words: “political opposition,” Poole says. Many state and local governments simply lack the stomach to back unpopular tolls or taxes. Before the lease agreement, the Indiana Toll Road went for 20 years without a toll increase; in real (inflation-adjusted) dollars, tolls actually decreased every year, Poole says. In some cases, the cost of collecting the toll was greater than the amount of the toll payment. “Long-term concession agreements provide the only way we know so far to make tolls keep pace with inflation so roads can be properly maintained over time,” Poole says.

Not so, says Enright, who analyzed the Chicago Skyway and Indiana Toll Road P3s. Indiana could have gotten a valuation $1 billion higher than the $3.85 billion paid by Cintra-Maquarie had it raised the money through tax-exempt bonds rather than private equity financing, Enright says. “It’s cheaper for public entities to borrow money than private entities.” Under such bond financing, toll increases would have been written into the contract between the bond holders and the toll authority, effectively taking politics out of the mix, Enright says.

Despite such possible alternatives, plenty of states already have opted for the P3 approach. As far back as the 1990s, seven states, including Alabama, Virginia and California, completed small P3 toll projects totaling $1.3 billion in new private capital investment, according to the Reason Foundation’s 2006 Annual Privatization Report. Four states – Illinois, Indiana, Michigan and Virginia – have privatized existing roads, totaling $6.4 billion. And six states had $25.7 billion in new private investment projects underway for new toll roads or toll lanes as of early last year. The trend has been encouraged by the Bush administration, which has drafted model legislation for states to adopt that would permit such partnerships.

The movement toward P3s has captured the attention of politicians in Washington. In a letter sent in May to governors, state legislators and state transportation officials, U.S. Rep Jim Oberstar, D-Minn., chairman of the U.S. House Committee on Transportation and Infrastructure and a subcommittee chairman, warned states not to rush into P3s involving national highways. The letter also threatened to take action against some P3s in the 2009 transportation bill. “The committee will work to undo any state P3 agreements that do not fully protect the public interest and the integrity of the national system,” it read.

“I interpret that as seeing their status quo threatened,” Poole says. While he admits the representatives no doubt have substantive policy concerns, “it’s also power, because states are making an end run around Congress” to expand the highway system.

The guiding hand of Washington is important, Oberstar told a hearing in February. “I am not convinced that 50 states, each pursuing its separate transportation priorities with their respective private-sector partners, will … produce a coherent, integrated, national surface transportation system.”

Proponents acknowledge that P3s have their potential pitfalls. For instance, Texas’ $90 million Camino Colombia toll road attracted only 13 percent of projected traffic – due partly to the $16 fee it charged for trucks to run the 22-mile route. The state bought it back in 2004 for a mere $20 million. In California, congestion forced county officials to buy the 91 Express toll lanes from the private investors that built them so that the county could expand adjacent non-toll lanes without violating a non-compete clause.

In those cases, proponents say, the problem stemmed not from the P3 concept, but from poorly formed agreements. “An enormous amount of public control” can be written into P3 contracts, which often contain detailed provisions limiting toll rates and allowing for adjustments to changing market conditions, Norment says.

That’s especially important given the length of some leases, such as 75 years for the Indiana Toll Road. That agreement states that if the toll road “isn’t operated correctly, they keep the $3.8 billion and get the road back,” Norment says.

Indiana owner-operator Randy Nace stands by his efforts to stop the Indiana Toll Road deal, pointing out that while New Jersey and Pennsylvania are considering P3s, they “didn’t just jump on the bandwagon.” “We may have lost it here in Indiana,” he says, “but we’ve had an impact on other states.”


OTHER WAYS TO FUND ROADS
With the Federal Highway Trust Fund on the brink of bankruptcy, where do opponents of public-private partnerships think money for road maintenance and new roads should come from? A recent report produced on behalf of the American Trucking Associations by the American Transportation Research Institute outlined some recommendations:

Increase the federal fuel tax. A 20-cent per gallon tax increase on gasoline and diesel would generate $35.1 billion in one year.

Eliminate earmarks. Money collected from fuel and vehicle taxes too often, gets diverted at the state level to projects that do little to improve transportation for most motorists. Had such projects been cut from the most recent highway bill, more than $24 billion would have been available for highway projects, according to the nonpartisan watchdog group Taxpayers for Common Sense.

Reduce fuel tax evasion. Stemming the flow of fuel tax revenue lost annually to bootlegging, false refund claims and the sale of blended fuel could add from $1 billion to $9 billion to the coffers.

Eliminate fuel tax exemptions. Government fleets consume more than 3 billion gallons of fuel annually, yet are exempt from fuel taxes. Taxing these vehicles would yield $907 million or more each year.

Decrease diversions. Interest generated annually by the billions of dollars in the federal Highway Trust Fund is sent to the general fund instead of to transportation. Recapturing that interest could free up about $2 billion annually for roads. Another $70 million per year is diverted to an Environmental Protection Agency program to clean up leaking underground fuel storage tanks.


THE COST OF PLAYING CATCH-UP
Both sides of the privatization debate agree on two points: Highways are overcrowded in many areas and badly in need of repair. And our current system for funding road building and maintenance needs a serious overhaul.

Congestion sucks $168 billion per year out of the U.S. economy. The worst bottlenecks delayed trucks for 243 million hours in 2004, costing trucking nearly $8 billion, according to the Federal Highway Administration.

Getting the money needed to address the problem is a challenge. Annual Highway Trust Fund revenue will fall $23 billion short of maintaining highway and transit systems and $48 billion short of improving them, according to a 2005 report from the National Chamber Foundation of the U.S. Chamber of Commerce. The most recent highway act guarantees $286 billion in federal funding for highway and transit capital improvements through 2009. Yet the chamber estimates that revenue coming into the Highway Trust Fund during this period will total only about $231 billion. If nothing changes, the fund will go bankrupt in 2008.

Meanwhile, important trucking routes such as I-75 and I-5 in California, I-15 in California and Utah and I-70 across the country need new capacity.


NO CARS ALLOWED
Imagine sharing the road exclusively with other professional truckers, with no pesky four-wheelers in sight.

That could become a reality if highway planners in places such as Atlanta, Virginia and California get their way. The Atlanta proposal would add truck-only toll lanes on about half of I-285 and on I-75 and I-85 outside the perimeter highway. Adding the lanes would reduce congestion and improve safety, say advocates such as Robert Poole of the Reason Foundation. But, he concedes, “It depends on how high the tolls are.”

Increased productivity would offset the cost for truckers, says Richard Norment with the National Council for Public-Private Partnerships. “If you cut two to three hours you can save $300,” he says, assuming an operational cost of $150 an hour.

But many truckers oppose the idea, particularly if the truck-only toll lanes are mandatory, as has been proposed in Atlanta. A mandate means driving the toll lane “isn’t worth doing to anyone who uses the road, so we’re going to have to force them,” Ed Crowell, president of the Georgia Motor Trucking Association, recently told the Atlanta Journal-Constitution.

Proponents argue that truck-only lanes eventually would ease congestion by enabling truckers to haul more freight using fewer, but bigger, trucks. Language in a recent energy bill would increase truck weight to 97,000 lbs. with an additional axle, says Bob Costello, American Trucking Associations’ chief economist. Getting such legislation passed is “a huge uphill challenge,” he told the CCJ Symposium in Tuscaloosa, Ala., last month. “What would make those size and weight gains easier for politicians to stomach is if we started to separate traffic.”


FOREIGN CONTROL OF U.S. TRANSPORT HARDLY A NEW IDEA
In January 2006, when the 75-year Indiana Toll Road lease was not yet a done deal, the Owner-Operator Independent Drivers Association issued an urgent letter to its Indiana members. “The toll road is an integral part of the National Interstate Defense Highway System,” OOIDA’s Todd Spencer wrote, “and the governor wants to sell it to a foreign country!”

In November 2006, as the privatization controversy turned eastward, Spencer issued another statement: “Proposals to sell the Pennsylvania Turnpike to private companies are un-American, and to consider selling this national asset to foreign companies is just plain anti-American.”

Aside from all the other issues raised by highway privatization, the fact that the major bidders tend to be foreign companies particularly sticks in the craw of many critics. “Is America for sale?” asks conservative activist Phyllis Schlafly in a recent essay titled “Greedy Politicians Seduced by Siren Song of Filthy Foreign Lucre.”

Foreign-run U.S. toll roads are relatively few. They include the Chicago Skyway and the Indiana Toll Road, the Dulles Greenway and Pocahontas Parkway in Virginia and the new South Bay Expressway in San Diego. But others are in the works, and global toll-road-management companies are interested in more U.S. business.

If expertise is sought globally and not locally, as Pulitzer winner Thomas Friedman argues in his best seller “The World Is Flat: A Brief History of the 21st Century,” then expertise in private road management – for now, at least – is mostly abroad, where such deals have been common for years. So you’re sure to hear more about “foreign landlords” as the debate over highway privatization continues.

The pro-privatization Reason Foundation argues that foreign companies operating in this country are subject to the same U.S. laws and regulations as U.S. companies. U.S. law enforcement doesn’t declare a property off limits just because it’s foreign-run.

Thriving foreign-owned companies in the United States also tend to employ many Americans. Just ask anyone at Freightliner or Mack, foreign-owned since 1981 and 1990, respectively, or any owner-operator who makes his living driving their trucks – or Volvo’s.

And while foreign-run toll roads in the United States may be new, foreign management of U.S. transportation is not. Truckers who haul in and out of any major U.S. port, for example, already operate on foreign-run roads. According to the Reason Foundation, 80 percent of U.S. port terminals are run by foreign companies on long-term leases, including 80 percent of the terminals at the Port of Los Angeles. These remain under the watchful eye of the U.S. Coast Guard, the U.S. Transportation Security Agency and other government entities.

Legislators who OK’d the Indiana Toll Road lease had good examples close at hand of foreign companies managing critical infrastructure with no problems. Indianapolis is one of the 600 towns and cities nationwide dependent on Veolia, a subsidiary of a French company, for their drinking water. Moreover, Indianapolis International Airport has been run since 1995 by the U.S. subsidiary of a British company, BAA.

Just as Veolia’s waterworks must answer to local governments, BAA must answer to the Indianapolis Airport Authority, a public body that has repeatedly renewed BAA’s contract. Smaller U.S. airports from Orlando, Fla., to Burbank, Calif., are run by foreign companies, as well.

That foreign involvement in U.S. infrastructure is an increasingly sensitive political issue was demonstrated by the 2006 furor on Capitol Hill about the prospect of Dubai Ports World, a state-owned company in the United Arab Emirates, taking over management of some U.S. ports. Two-thirds of Americans polled said they opposed the deal. Dubai Ports World ultimately bowed out of the controversy.

The deal prompted U.S. Rep. Duncan Hunter, R-Calif., to sponsor the National Defense Critical Infrastructure Protection Act, which died in committee. It would have prohibited foreign companies from owning or managing any assets deemed by the U.S. government to be “critical.”

In response, Leonard Gilroy and Adam Summers of the Reason Foundation wrote: “Desperate cries of ‘national security’ have robbed Americans of many other rights and liberties already. Is free enterprise next?”

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